No tax returns? No problem
Mortgage companies need to verify your income before they’ll approve you for a home loan. They usually do this by looking at W2 tax forms.
That can be a problem if you work for yourself. Business owners, freelancers, contractors, and seasonal or gig workers likely won’t have the tax forms needed for a traditional mortgage.
But if you have non-traditional income, you might be able to get a “bank statement mortgage.”
That means you prove your income by showing one or two years of regular deposits into your bank account.
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How lenders determine your income
When buying or refinancing a home, there are specific steps to go through.
One step requires documenting your income. That includes savings, retirement, investment balances, and debts.
This can be challenging for self-employed mortgage applicants. These folks often have hard-to-document income and/or business expenses.
For instance, a self-employed borrower might earn $7,000 a month. But after business write-offs, their tax forms may document an income of only $5,000 a month.
This could reduce their home buying budget by more than $150,000.
|Documented monthly income||$7,000||$5,000|
|Qualified monthly mortgage payment||$2,020||$1,300|
|Qualified home buying budget||$443,900||$285,700|
Loan assumptions: Example assumes a 30-year, fixed-rate mortgage with 3.75% interest and 10% down on a home located in Washington. Your own rate and monthly payments will be different
How to get a mortgage when you’re self-employed or a freelancer
So, you’re self-employed or run a side hustle. You have a strong credit score and a solid financial track record. But you’re having trouble qualifying for a mortgage because you don’t have traditional W2s to document your income.
Fortunately, a bank statement loan program may be an ideal solution.
Here we explain how bank statement loans work and how to find out whether you’ll qualify for one.
What is a bank statement mortgage program?
A bank statement mortgage program allows you to verify your income on a mortgage application using documented bank deposits instead of tax forms.
Traditional mortgage loans use tax returns, W2s and pay stubs to verify monthly income.
The higher your monthly income, the lower your debt-to-income ratio (DTI), and a lower DTI can justify a higher loan amount.
But providing those traditional employment documents will be impossible for people who don’t have full-time employers. Instead, mortgage applicants may opt for a bank statement loan program.
Using personal bank statements to qualify for a mortgage instead of W2s might be a good loan option if:
- You don’t have traditional tax documents to verify your total income
- You have tax documents, but due to write-offs, your income looks smaller than it really is
Once upon a time, stated income loans were a common mortgage solution for borrowers who couldn’t document their full income. But stricter regulations in response to the mortgage crisis of the late 2000s have made stated income loans a thing of the past.
Today, bank statement loans have become more popular because they create less risk for lenders. Borrowers don’t simply “state” their income anymore. With bank statement loans, applicants must document monthly deposits in order to qualify.
Who should get a bank statement loan?
If you’re a business owner or an independent contractor without a salaried income, getting qualified for a traditional home loan can be difficult.
A bank statement loan program can help. This type of loan is typically used by:
- Self-employed applicants
- Independent contractors
- Workers with seasonal income
- Gig workers, side hustlers, or freelancers
- Other earners with irregular income streams
Self-employed applicants are the most common folks to benefit from bank statement loans. But anyone who wants to go this route to buy a new home, or to refinance an existing loan, can apply.
If you need to document income but don’t have pay stubs and W2s, ask your mortgage broker or lender about underwriting based on personal bank statements.
You may find that mortgage eligibility is easier than you expected.
Types of bank statement loans
Depending on the lender and your specific situation, there are different bank statement loan programs available.
While most lenders require a minimum of 12 months of bank statements, some may require less. Keep in mind that applicants who can provide 24 months of statements may qualify for better rates and terms.
In addition, some lenders may want you to use business bank statements as opposed to personal bank statements.
If you don’t have business bank statements, you may still be able to use your personal statements with those lenders. However, they might use a smaller percentage of your deposits for qualifying purposes.
In some cases, borrowers also may be required to provide a profit and loss (P&L) statement for their business prepared by a tax professional.
Drawbacks of bank statement loans
Fortunately for homeowners who can’t provide the usual income verification, bank statement loans are becoming increasingly common.
But these are still considered higher risk than traditional mortgages. And that means there’s a trade-off between lenders and borrowers.
The trade-off typically comes in the form of a higher interest rate and higher down payment requirements.
Bank statement loans typically have a higher interest rate and bigger down payment requirements.
These extra costs offset the risk associated with not being able to show income via traditional methods.
The exact rate and necessary down payment for bank statement loans are usually based on credit scores.
Remember, rates and terms vary a lot by company. Talk with more than one mortgage lender to see who has the lowest rates and best terms on the loan you need.
How to find a bank statement mortgage
Bank statement mortgages are categorized as “non-qualified mortgages” (Non-QM) since they don’t conform to conforming loan standards set by Fannie Mae and Freddie Mac.
Since they’re considered to be Non-QM, not all lenders offer bank statement mortgages. In fact, many banks and credit unions choose not to offer these types of loans.
You might have better luck with a company that does only mortgage lending.
If you don’t qualify for traditional mortgage financing, contact several lenders to determine if they offer bank statement programs or other programs for self-employed applicants.
Be sure to ask about the lender’s requirements for personal vs. business statements. You should also find out how many months of statements the lender will require.
And don’t forget to ask about down payment requirements and interest rates.
Bank statement mortgage FAQ
Bank statement mortgage programs use your bank statements to document your income rather than depending on pay stubs or W2s — forms most self-employed borrowers don’t have.
A bank statement mortgage might be a good option if you’re self-employed and your tax write-offs make your income look much smaller than it really is. However, these loans have higher interest rates. So it’s typically best to stick with a conforming loan or government-backed loan if you can qualify via one of those programs.
Since they’re non-conforming loans, your lender may require a higher down payment, such as 10 or 20 percent. Lenders may want to see a higher credit score than the 620 conventional loans usually require. In this sense, bank statement loans resemble jumbo loans.
Yes, this kind of borrowing works for primary residences along with second homes, vacation homes, or investment properties.
Yes, bank statement loan programs work for refinance loans, including cash-out refinances for borrowers who have enough home equity to meet lending requirements.
No, FHA does not offer a bank statement loan. Instead, the lender may use tax transcripts to verify two years of income for self-employed borrowers.
Yes, unless you put down 20 percent or more. If you can’t make a 20 percent down payment, you can still cancel mortgage insurance later, once your loan-to-value ratio (LTV) reaches 80 percent or lower.
It’s common for lenders to ask for bank statements even if you’re not using them to document a regular flow of income. If you’re employed and using W2s and pay stubs to show your income, your lender will probably need only two to three months of bank statements — not the 12 to 24 months needed for a bank statement loan.
What are today’s mortgage rates?
Are you self-employed? Do you earn seasonal income? Are you a consultant, promoter, tax-preparer, freelancer, artist or other professional with an irregular income stream?
If so, a bank statement loan program may be perfect for you.
Rates and down payment requirements vary from one lender to the next. It’s always good to shop around the find the lowest rate possible.
You can get started right here.